In late 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with the goal of increasing participation in tax-qualified retirement plans such as IRAs and 401(k) plans. Here are five important changes in the new law, which could significantly affect how your company approaches its retirement plan benefits:
Tax Credits to Encourage New Plans. Companies with 100 or fewer employees that start a new 401(k) plan are now eligible for a tax credit up to $5,000 a year for the first three years to cover administrative and startup costs. The exact amount of the credit depends on the actual costs incurred and the number of employees enrolled, among other factors. Employers may also qualify for a $500 per year credit for three years for adding automatic enrollment to a qualified plan.
Extended Deadlines to Set Up New Plans. In the past, companies had until the end of the calendar year to establish a qualified retirement plan. That deadline has now changed to match the company’s tax filing deadline, including extensions. This makes it easier for companies to set up and start funding a new plan as part of their post-closing tax preparation.
New Rules for Multiple Employer Plans (MEPs). By joining their retirement plans into a single, larger program, companies often can get better pricing on administrative costs and other benefits. In the past, such MEPs were permitted only for companies that were related or had something in common, such as membership in a trade group or chamber of commerce. Beginning in 2021, companies without such common features will be able to pool their plans as well.
Participation by Long-Term Part-Time Employees. In addition to full-time employees, companies with qualified retirement plans must now open their plans to many part-time employees as well, provided those employees have three years of consecutive service with the company and work at least 500 hours a year.
Annuities. Plans can now include annuity products that can provide retired workers with a lifetime income stream.
In addition to changes affecting your company, the SECURE Act also could have far-reaching effects on your individual estate planning:
Delayed Required Minimum Distribution (RMD) Requirements. The SECURE Act raised the age at which taxpayers must start taking minimum distributions from their IRAs from 70½ to 72. Although the Coronavirus Aid, Relief, and Economic Security (CARES) Act has eliminated the RMD for IRAs and other qualified retirement plans for 2020, the SECURE Act’s new age requirement is a permanent change that goes beyond the current tax year.
Removal of IRA Age Limits. The SECURE Act eliminated the previous 70½-year age limit on traditional IRA contributions. You may now continue contributing up to $7,000 a year to your IRA regardless of age, as long as you have that much earned income.
Penalty-Free Withdrawals. Parents of newly born or newly adopted children may now withdraw up to $5,000 per child from their IRAs or qualified deferred compensation plans without paying an early-withdrawal penalty. The $5,000 allowance applies to each parent, so a couple could withdraw up to $10,000 penalty free. (Note again that the CARES Act permits some additional penalty-free IRA withdrawals for taxpayers affected by the coronavirus.)
Accelerated “Stretch” IRA Distributions. Previously, after the death of an IRA owner, the beneficiary of that IRA could extend his or her distributions from the account over their lifetime. Such “stretch” IRAs enabled many taxpayers to pass on wealth to children or grandchildren in a tax-deferred manner. The SECURE Act changed that. Beneficiaries must now liquidate inherited IRAs within 10 years, unless they are a surviving spouse or minor child or are disabled, chronically ill, or not more than 10 years younger than the deceased.
Finally, the SECURE Act also includes some provisions not related to retirement planning. One of these reduces the so-called “Kiddie Tax” rate that applies to dependent children who have unearned investment income. The 2017 tax reform increased that rate, but the SECURE Act reduced it again retroactively to match the parent’s marginal tax rate.
The SECURE Act made numerous other changes to retirement-related tax laws. Please call us to schedule an in-depth analysis of the issues relevant to you and your business.